UPDATE 1-Record-low euro zone inflation expectations put pressure on ECB

(Updates throughout, adds chart comment)

By Dhara Ranasinghe

LONDON, March 6 (Reuters) – A key gauge of long-term inflation expectations in the euro area slid on Friday to record lows not far off 1%, putting more pressure on the European Central Bank to take action to shore up economic growth in the face of the coronavirus outbreak.

The five-year, five-year break-even forward, a market gauge of euro zone inflation expectations over the long term, slumped to a record low of 1.0327%. It has tumbled 25 basis points in the past month.

“We know the ECB keeps an eye on this, and they don’t quite know how to interpret this indicator, which also moves in line with oil prices,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

“But there’s no doubt that the euro zone is at risk of recession, which will push back the modest progress in underlying inflation that we’ve seen recently.”

Brent crude oil prices fell 2% on Friday as worries an economic slowdown caused by the coronavirus will cut global oil demand. Those worries were compounded by concern that non-OPEC crude producers had not yet agreed to cut output further.

The ECB, which targets inflation at close but under 2%, is scheduled to meet next Thursday.

Central banks in the United States, Canada and Australia all cut rates this week, and focus is now on what measures European central banks will take.

Analysts noted that the implied inflation expectations in the five-year, five-year break-even forwards are complicated by the fact that the measure trades in line with other fixed-income instruments, and so was benefiting from a general flight to safety.

U.S. and German bond yields , for instance, were both down on Friday. “It does reflect the flight-to- safety, but also the change in the macro economic outlook and the limited scope for the ECB to act,” said Commerzbank rate strategist Rainer Guntermann, referring to the five-year, five-year forward.

Even after years of monetary policy stimulus and interest rates at record lows, inflation in the euro area remains well below the ECB target.

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